Research articles for the 2019-09-18
Access to Finance and Innovation in Small and Medium Enterprises- Evidence in Vietnam
SSRN
This paper examines the relation between a firm’s capacity to access external capital and its innovation among SMEs in Vietnam. We find that SMEs with high debt ratio tend to be more innovative. After controlling for several firm characteristics, long term debt remains significantly positively correlated with innovation. We further show that both bank loans and loans from family and friends help these firms innovate, especially in developing new products and/or technology. Overall, our paper suggests that external financing plays an important role in enhancing innovation in small and medium enterprises.
SSRN
This paper examines the relation between a firm’s capacity to access external capital and its innovation among SMEs in Vietnam. We find that SMEs with high debt ratio tend to be more innovative. After controlling for several firm characteristics, long term debt remains significantly positively correlated with innovation. We further show that both bank loans and loans from family and friends help these firms innovate, especially in developing new products and/or technology. Overall, our paper suggests that external financing plays an important role in enhancing innovation in small and medium enterprises.
An Empirical Study on Arrival Rates of Limit Orders and Order Cancellation Rates in Borsa Istanbul
arXiv
arXiv
Order book dynamics play an important role in both execution time and price formation of orders in an exchange market. In this study, we aim to model the limit order arrival rates in the vicinity of the best bid and the best ask price levels. We use limit order book data for Garanti Bank, which is one of the most traded stocks in Borsa Istanbul. In order to model the daily, weekly, and monthly arrival of limit order quantities, three different discrete probability distributions are tested: Geometric, Beta-Binomial and Discrete Weibull. Additionally, two theoretical models, namely, Exponential and Power law are also tested. We aim to model the arrival rates in the first fifteen bid and ask price levels. We use L1 norms in order to calculate the goodness-of-fit statistics. Furthermore, we examine the structure of weekly and monthly mean cancellation rates in the first ten bid and ask price levels.
An Evaluation of Chinese Securities Investment Fund Performance
SSRN
This study evaluates the performance of open-end securities investment funds investing in Chinese domestic equity during the period May 2002 to May 2014. A dataset of 419 funds is examined. High frequency weekly data are employed. This study implements a wide range of risk-adjusted performance measures which are divided into three broad classes, (i) unconditional models (Jensen, 1968, Fama and French, 1993 and Carhart, 1997), (ii) conditional-beta models, in which factor loadings are allowed to vary conditional upon publicly available information (Ferson and Schadt (1996) and (iii) conditional alpha-beta models where alphas are also time-varying conditional on economic information (Christopherson et al., 1998). Estimation diagnostics are then applied to select one ‘best-fit’ model within each of the three classes. Findings from all performance measures suggest no evidence of either statistically significant stock selection skills or market timing ability on average. Based on the statistical significance of the individual parameters and the Schwartz Information Criterion (SIC), a single ‘best-fit’ model from each of the classes is selected. In the case of the Chinese fund industry, this study is the first paper to evaluate fund performance using higher frequency weekly data, is the first to estimate conditional versions of performance attribution models and is the first to examine the time-varying parameters augmentations of the Treynor and Mazuy (1966) and Merton and Henriksson (1981) models.
SSRN
This study evaluates the performance of open-end securities investment funds investing in Chinese domestic equity during the period May 2002 to May 2014. A dataset of 419 funds is examined. High frequency weekly data are employed. This study implements a wide range of risk-adjusted performance measures which are divided into three broad classes, (i) unconditional models (Jensen, 1968, Fama and French, 1993 and Carhart, 1997), (ii) conditional-beta models, in which factor loadings are allowed to vary conditional upon publicly available information (Ferson and Schadt (1996) and (iii) conditional alpha-beta models where alphas are also time-varying conditional on economic information (Christopherson et al., 1998). Estimation diagnostics are then applied to select one ‘best-fit’ model within each of the three classes. Findings from all performance measures suggest no evidence of either statistically significant stock selection skills or market timing ability on average. Based on the statistical significance of the individual parameters and the Schwartz Information Criterion (SIC), a single ‘best-fit’ model from each of the classes is selected. In the case of the Chinese fund industry, this study is the first paper to evaluate fund performance using higher frequency weekly data, is the first to estimate conditional versions of performance attribution models and is the first to examine the time-varying parameters augmentations of the Treynor and Mazuy (1966) and Merton and Henriksson (1981) models.
An Extension of Markowitz' Modern Portfolio Theory for Long-Term Equity Investors
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In this work, I introduce a new investment strategy for long-term equity investors. In particular, my proposed portfolio relies on the mean-variance approach as in Markowitz (1952), and it requires the same input estimates and is vividly located on the efficient frontier. The analytic (in-sample) formula of my portfolio is thus derived from a rather simple principle in finance: 'High potential returns require high risk'. Based on this fact, I propose a theory assuming that the importance of a portfolio standard deviation must somehow decrease for expanding investment horizons, and I therefore imply that risk-adjusted metrics such as Sharpe ratio and information ratio cannot adequately be used for judging a portfolio strategy over the long-term. Specifically, I compare my new strategy with other traditional portfolios for a set of 14 US stocks, during an out-of-sample time period from 1/1975 until 6/2019. For all portfolios, I consider the buy & hold-, a naïvely rebalanced- and a strategic procedure, where in the latter case the portfolios are rebalanced annually based on an expanding estimation window. The empirical results prove that my proposed strategy significantly outperforms all other traditional portfolios in the long run, in terms of cumulative performance.
SSRN
In this work, I introduce a new investment strategy for long-term equity investors. In particular, my proposed portfolio relies on the mean-variance approach as in Markowitz (1952), and it requires the same input estimates and is vividly located on the efficient frontier. The analytic (in-sample) formula of my portfolio is thus derived from a rather simple principle in finance: 'High potential returns require high risk'. Based on this fact, I propose a theory assuming that the importance of a portfolio standard deviation must somehow decrease for expanding investment horizons, and I therefore imply that risk-adjusted metrics such as Sharpe ratio and information ratio cannot adequately be used for judging a portfolio strategy over the long-term. Specifically, I compare my new strategy with other traditional portfolios for a set of 14 US stocks, during an out-of-sample time period from 1/1975 until 6/2019. For all portfolios, I consider the buy & hold-, a naïvely rebalanced- and a strategic procedure, where in the latter case the portfolios are rebalanced annually based on an expanding estimation window. The empirical results prove that my proposed strategy significantly outperforms all other traditional portfolios in the long run, in terms of cumulative performance.
Creditor Control Rights and Borrower Protection: The Role of Borrower Consent Clause in Private Debt Contracts
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In private debt contracts with a borrower consent clause, a creditor’s decision to transfer its portion of the loan can be thwarted if the borrower denies the consent to loan transfer. We find that the probability of the inclusion of a borrower consent clause in a private debt contract increases in the intensity of accompanying creditor control rights in the contract. This association is more pronounced for larger and less risky borrowers. We also find that loans with a borrower consent clause have lower secondary market liquidity and larger stock market returns around the announcement of the loans. We argue that consent clauses are important contractual innovations that are created to protect borrowers in response to the rise of the originate-to-distribute model of banking and the recent increase in nonbank investors’ interest in the corporate loan market.
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In private debt contracts with a borrower consent clause, a creditor’s decision to transfer its portion of the loan can be thwarted if the borrower denies the consent to loan transfer. We find that the probability of the inclusion of a borrower consent clause in a private debt contract increases in the intensity of accompanying creditor control rights in the contract. This association is more pronounced for larger and less risky borrowers. We also find that loans with a borrower consent clause have lower secondary market liquidity and larger stock market returns around the announcement of the loans. We argue that consent clauses are important contractual innovations that are created to protect borrowers in response to the rise of the originate-to-distribute model of banking and the recent increase in nonbank investors’ interest in the corporate loan market.
Do Female CEOs Make a Difference? Evidence From Vietnam
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This paper examines the effect of gender in corporate leadership on firm performance and risk taking for Vietnamese listed firms. We find that firms with female CEOs generate higher profitability than those with male CEOs. In addition, firms led by female CEOs experience less systematic and idiosyncratic risks as well as low volatility of return on assets. These results are robust under different regression specifications. Our results support the hypothesis that women offer unique perspectives, experiences and styles of work that benefit firms and provide evidence for continuing government efforts to improve gender equality in Vietnam.
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This paper examines the effect of gender in corporate leadership on firm performance and risk taking for Vietnamese listed firms. We find that firms with female CEOs generate higher profitability than those with male CEOs. In addition, firms led by female CEOs experience less systematic and idiosyncratic risks as well as low volatility of return on assets. These results are robust under different regression specifications. Our results support the hypothesis that women offer unique perspectives, experiences and styles of work that benefit firms and provide evidence for continuing government efforts to improve gender equality in Vietnam.
Do Long-Tenured Boards Provide Stability?
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We document a negative relationship between average director tenure and return volatility. Difference-in-differences analysis shows that firms losing long-tenured directors experience 16.75% higher return volatility compared to control firms. Regarding the mechanisms, long-tenured boards tend to make predictable decisions. These firms have smoother investment patterns and are more likely to promote internal candidates as CEOs. We also find evidence that analyst forecast is more precise for these firms, suggesting a smaller information gap between the management and the outside investors. Our work contributes to the literature by showing that board characteristics affect firm's risk taking behavior.
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We document a negative relationship between average director tenure and return volatility. Difference-in-differences analysis shows that firms losing long-tenured directors experience 16.75% higher return volatility compared to control firms. Regarding the mechanisms, long-tenured boards tend to make predictable decisions. These firms have smoother investment patterns and are more likely to promote internal candidates as CEOs. We also find evidence that analyst forecast is more precise for these firms, suggesting a smaller information gap between the management and the outside investors. Our work contributes to the literature by showing that board characteristics affect firm's risk taking behavior.
Do Takeover Threats Suppress Corporate Willingness to Invest? Evidence From State Antitakeover Legislations
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We use a revealed-preference approach to assess the impact of the exogenous relief in takeover threats, proxied by the staggered passages of state antitakeover laws, on corporate willingness to invest. By estimating an augmented investment Euler equation, we find that firms, particularly those are small, belonging in competitive industries, and bearing severe agency problems, apply lower discount rates to their investments after the legislations. The results hold up to addressing several legal and institutional aspects of the legislations. Using high-order moment estimators, we find that the investment-q sensitivities of affected firms, especially of those experiencing sharper discount rate declines, increase after the passage of the laws. Our results suggest that takeover pressure suppresses corporate desire to invest.
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We use a revealed-preference approach to assess the impact of the exogenous relief in takeover threats, proxied by the staggered passages of state antitakeover laws, on corporate willingness to invest. By estimating an augmented investment Euler equation, we find that firms, particularly those are small, belonging in competitive industries, and bearing severe agency problems, apply lower discount rates to their investments after the legislations. The results hold up to addressing several legal and institutional aspects of the legislations. Using high-order moment estimators, we find that the investment-q sensitivities of affected firms, especially of those experiencing sharper discount rate declines, increase after the passage of the laws. Our results suggest that takeover pressure suppresses corporate desire to invest.
Executives’ Legal Records and the Deterrent Effect of Corporate Governance
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We study whether the effectiveness of corporate governance mechanisms varies depending on the characteristics of the executives subject to these mechanisms - namely, their “psychological typeâ€, as proxied by their history of legal infractions. In particular, we examine insider trading, where we can compare the trading behavior of different types of executives in the same firm. We find that “recordholder†executives, i.e., those with prior legal infractions, earn significantly higher profits from purchases and sales than nonrecordholder executives. Further, the profitability of both purchases and sales is significantly increasing in the severity of the infraction. Governance mechanisms, such as blackout policies, lower profits of executives with only traffic infractions; however, profits for executives with serious infractions appear insensitive to blackout policies. Insiders with serious infractions are also more likely to trade during blackout periods and before large information events and are more likely to report their trades to the SEC after the filing deadline. Collectively, our evidence suggests that while governance mechanisms can discipline executives with minor offenses, they appear largely ineffective for those with more serious infractions.
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We study whether the effectiveness of corporate governance mechanisms varies depending on the characteristics of the executives subject to these mechanisms - namely, their “psychological typeâ€, as proxied by their history of legal infractions. In particular, we examine insider trading, where we can compare the trading behavior of different types of executives in the same firm. We find that “recordholder†executives, i.e., those with prior legal infractions, earn significantly higher profits from purchases and sales than nonrecordholder executives. Further, the profitability of both purchases and sales is significantly increasing in the severity of the infraction. Governance mechanisms, such as blackout policies, lower profits of executives with only traffic infractions; however, profits for executives with serious infractions appear insensitive to blackout policies. Insiders with serious infractions are also more likely to trade during blackout periods and before large information events and are more likely to report their trades to the SEC after the filing deadline. Collectively, our evidence suggests that while governance mechanisms can discipline executives with minor offenses, they appear largely ineffective for those with more serious infractions.
Extracting Option-Implied Probability of Default: A Novel Method
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In this paper, we present a novel method to extract the risk-neutral probability of default from American put option prices. Under the assumptions of Carr and Wu (2011), we derive a closed form expression for American put options from which the probability of default can be inferred. Our empirical results based on four large institutions in the US during the 2007-2009 crisis show that directly applying the methodology of Carr and Wu (2011) can overestimate the probability of default. Our model also allows us to test the effect of positive equity recovery on estimated default probabilities.
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In this paper, we present a novel method to extract the risk-neutral probability of default from American put option prices. Under the assumptions of Carr and Wu (2011), we derive a closed form expression for American put options from which the probability of default can be inferred. Our empirical results based on four large institutions in the US during the 2007-2009 crisis show that directly applying the methodology of Carr and Wu (2011) can overestimate the probability of default. Our model also allows us to test the effect of positive equity recovery on estimated default probabilities.
Financial Frictions and the Wealth Distribution
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This paper investigates how, in a heterogeneous agents model with ï¬nancial frictions, idiosyncratic individual shocks interact with exogenous aggregate shocks to generate time-varying levels of leverage and endogenous aggregate risk. To do so, we show how such a model can be efficiently computed, despite its substantial non-linearities, using tools from machine learning. We also illustrate how the model can be structurally estimated with a likelihood function, using tools from inference with diffusions. We document, ï¬rst, the strong non-linearities created by ï¬nancial frictions. Second, we report the existence of multiple stochastic steady states with properties that differ from the deterministic steady state along important dimensions. Third, we illustrate how the generalized impulse response functions of the model are highly state-dependent. In particular, we ï¬nd that the recovery after a negative aggregate shock is more sluggish when the economy is more lever-aged. Fourth, we prove that wealth heterogeneity matters in this economy because of the asymmetric responses of household consumption decisions to aggregate shocks.
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This paper investigates how, in a heterogeneous agents model with ï¬nancial frictions, idiosyncratic individual shocks interact with exogenous aggregate shocks to generate time-varying levels of leverage and endogenous aggregate risk. To do so, we show how such a model can be efficiently computed, despite its substantial non-linearities, using tools from machine learning. We also illustrate how the model can be structurally estimated with a likelihood function, using tools from inference with diffusions. We document, ï¬rst, the strong non-linearities created by ï¬nancial frictions. Second, we report the existence of multiple stochastic steady states with properties that differ from the deterministic steady state along important dimensions. Third, we illustrate how the generalized impulse response functions of the model are highly state-dependent. In particular, we ï¬nd that the recovery after a negative aggregate shock is more sluggish when the economy is more lever-aged. Fourth, we prove that wealth heterogeneity matters in this economy because of the asymmetric responses of household consumption decisions to aggregate shocks.
How Lending Decisions Affect Consumer Behavior
SSRN
To understand how the supply of loans affects consumer behavior we track website visitors of an online furniture retailer offering short-term loans. For a regression discontinuity design we exploit different sets of cut-off rules in the lending function that shifted experimentally over time. Short-term loan offers induce interested window shoppers to finalize purchases, increasing the likelihood of a purchase by 19%, but not to spend more money by adding items. The effect of loan offers on inclinations to finalize purchases is more pronounced for consumers with lower credit scores that are less creditworthy and presumably more credit constrained.
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To understand how the supply of loans affects consumer behavior we track website visitors of an online furniture retailer offering short-term loans. For a regression discontinuity design we exploit different sets of cut-off rules in the lending function that shifted experimentally over time. Short-term loan offers induce interested window shoppers to finalize purchases, increasing the likelihood of a purchase by 19%, but not to spend more money by adding items. The effect of loan offers on inclinations to finalize purchases is more pronounced for consumers with lower credit scores that are less creditworthy and presumably more credit constrained.
Informe-pais Brasil
arXiv
arXiv
Structural socioeconomic analysis of Brazil. All basic information about this South American country is gathered in a comprehensive outlook that includes the challenges Brazil faces, as well as their causes and posible economic solutions.
Is the Predictive Value of Analysts' Recommendations in Decline?: New Evidence from the U.S. Stock Market
SSRN
Using 719,830 analyst recommendations from 1994 to 2017, we construct various portfolios based on levels and changes in analyst recommendations and examine how the value of those recommendations in predicting the abnormal stock returns has changed over time. We find that the predictive value of recommendations has been declining, especially after the implementation of NASD Rule 2711. More importantly, this decline in the predictive value results from the loss of its value in buy- and upgrade-related recommendations while sell- and downgrade-related ones are still associated with the negative abnormal returns. We also find a stronger relation between recommendations and stock returns in the post-Rule period. Our empirical results show that, in terms of stock returns, the Rule 2711 has mitigated the analysts’ conflicts of interest in stock recommendations
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Using 719,830 analyst recommendations from 1994 to 2017, we construct various portfolios based on levels and changes in analyst recommendations and examine how the value of those recommendations in predicting the abnormal stock returns has changed over time. We find that the predictive value of recommendations has been declining, especially after the implementation of NASD Rule 2711. More importantly, this decline in the predictive value results from the loss of its value in buy- and upgrade-related recommendations while sell- and downgrade-related ones are still associated with the negative abnormal returns. We also find a stronger relation between recommendations and stock returns in the post-Rule period. Our empirical results show that, in terms of stock returns, the Rule 2711 has mitigated the analysts’ conflicts of interest in stock recommendations
Life-Cycle Portfolio Choice with Imperfect Predictors
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We study how imperfect predictors of stock returns affect life-cycle consumption and portfolio choice in the presence of undiversifiable labor income risk. Imperfect predictability forces investors to filter unobservable expected stock returns from realized predictive variables and stock returns and condition their decisions on the perceived conditional mean and variance of future stock returns. Recognizing the additional uncertainty from imperfect predictability, portfolios are more conservative than models with either perfect predictors or i.i.d. stock returns. The model therefore provides an explanation for why young stockholders might hold conservative portfolios, and quantifies long run risks with imperfect stock market predictability.
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We study how imperfect predictors of stock returns affect life-cycle consumption and portfolio choice in the presence of undiversifiable labor income risk. Imperfect predictability forces investors to filter unobservable expected stock returns from realized predictive variables and stock returns and condition their decisions on the perceived conditional mean and variance of future stock returns. Recognizing the additional uncertainty from imperfect predictability, portfolios are more conservative than models with either perfect predictors or i.i.d. stock returns. The model therefore provides an explanation for why young stockholders might hold conservative portfolios, and quantifies long run risks with imperfect stock market predictability.
Machine Learning Versus Economic Restrictions: Evidence from Stock Return Predictability
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This paper shows that machine learning methods in asset pricing often fail to clear standard economic restrictions. In particular, investments that employ deep learning signals extract profitability primarily from difficult-to-arbitrage stocks and during market states associated with alleviated limits to arbitrage. Thus, value-weighting returns, excluding microcaps, and accounting for trading costs considerably attenuate, often eliminate, profitability. Despite their seemingly opaque nature, deep learning methods still identify mispriced stocks in line with most anomalies. Excluding restrictions, deep learning signals are profitable in long positions, remain viable in recent years, command low downside risk, and are more informative in stock picking than industry rotation.
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This paper shows that machine learning methods in asset pricing often fail to clear standard economic restrictions. In particular, investments that employ deep learning signals extract profitability primarily from difficult-to-arbitrage stocks and during market states associated with alleviated limits to arbitrage. Thus, value-weighting returns, excluding microcaps, and accounting for trading costs considerably attenuate, often eliminate, profitability. Despite their seemingly opaque nature, deep learning methods still identify mispriced stocks in line with most anomalies. Excluding restrictions, deep learning signals are profitable in long positions, remain viable in recent years, command low downside risk, and are more informative in stock picking than industry rotation.
Market Reaction to Exchange Listings of Cryptocurrencies
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Cryptocurrency markets operate at a global scale and are lightly regulated compared to traditional securities markets. Cryptocurrencies like Bitcoin trade across multiple secondary markets that differ significantly in term of liquidity, governance and trust. This study explores 327 exchange listings of 180 cryptocurrencies on 22 different cryptocurrency exchanges and examines the resulting price effects using event study methodology. The results show a significant average abnormal return of 7.4% on the day of the listing event and 9.2% in the window of three days before until three days after the listing. The effects clearly differ for individual cryptocurrency exchanges, with listings on only a few exchanges yielding significant positive short-term abnormal returns of up to 25.5% on the day of the listing. Other exchanges show no significant effects at all or even significant negative returns, which suggests informed trading or market manipulation. Additional tests show that higher market capitalization in combination with lower trading volume leads to higher abnormal returns at exchange listings of blockchain-based assets.
SSRN
Cryptocurrency markets operate at a global scale and are lightly regulated compared to traditional securities markets. Cryptocurrencies like Bitcoin trade across multiple secondary markets that differ significantly in term of liquidity, governance and trust. This study explores 327 exchange listings of 180 cryptocurrencies on 22 different cryptocurrency exchanges and examines the resulting price effects using event study methodology. The results show a significant average abnormal return of 7.4% on the day of the listing event and 9.2% in the window of three days before until three days after the listing. The effects clearly differ for individual cryptocurrency exchanges, with listings on only a few exchanges yielding significant positive short-term abnormal returns of up to 25.5% on the day of the listing. Other exchanges show no significant effects at all or even significant negative returns, which suggests informed trading or market manipulation. Additional tests show that higher market capitalization in combination with lower trading volume leads to higher abnormal returns at exchange listings of blockchain-based assets.
Multi-agent reinforcement learning for market microstructure statistical inference
arXiv
arXiv
Quantitative finance has had a long tradition of a bottom-up approach to complex systems inference via multi-agent systems (MAS). These statistical tools are based on modelling agents, which trade via a centralised order book to emulate complex and diverse market phenomena. Nevertheless, the issue of agent learning in MAS, which is crucial to price formation and hence to all market activity, has not yet fully benefited from the recent progress of artificial intelligence, and namely reinforcement learning. In order to address this, we present here a next-generation MAS stock market simulator, in which each agent learns to trade autonomously via reinforcement learning. We calibrate it to real market data from the London Stock Exchange over the years 2007 to 2018, and use it to highlight the beneficial impact of agent suboptimal learning on market stability.
Más allá de la transparencia, marcos de referencia para el abordaje e implementación del Gobierno Abierto en México. [Book Review: De la transparencia hacia un Gobierno Abierto, de Rafael MartÃnez Puón. 2017].
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Spanish Abstract: “De la Transparencia hacia un Gobierno Abiertoâ€, es la obra del Dr. Rafael MartÃnez Puón, desde la cual aborda el tránsito conceptual entre los distintos marcos de transparencia hacia la implantación de un sistema de Gobierno Abierto, tomando como base la gestión del capital más importante de la actualidad, la información. Es un análisis teórico y en la praxis, de la implementación de los componentes del modelo de Gobierno Abierto en la administración pública mexicana. La obra brinda el valor agregado de tejer puentes entre el pensamiento y la acción dentro de una institución pública e incentiva la discusión del futuro de nuevos modelos de Gobernanza Pública. Asimismo proyecta escenarios novedosos para la profesionalización de aquellos interesados en el terreno de la transformación social y del gobierno del siglo XXI. English Abstract: Book review "De la Transparencia hacia un Gobierno Abierto" by Rafael MartÃnez Puón. Experience and analysis of the implementation of Open Government components in the Mexican public administration.
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Spanish Abstract: “De la Transparencia hacia un Gobierno Abiertoâ€, es la obra del Dr. Rafael MartÃnez Puón, desde la cual aborda el tránsito conceptual entre los distintos marcos de transparencia hacia la implantación de un sistema de Gobierno Abierto, tomando como base la gestión del capital más importante de la actualidad, la información. Es un análisis teórico y en la praxis, de la implementación de los componentes del modelo de Gobierno Abierto en la administración pública mexicana. La obra brinda el valor agregado de tejer puentes entre el pensamiento y la acción dentro de una institución pública e incentiva la discusión del futuro de nuevos modelos de Gobernanza Pública. Asimismo proyecta escenarios novedosos para la profesionalización de aquellos interesados en el terreno de la transformación social y del gobierno del siglo XXI. English Abstract: Book review "De la Transparencia hacia un Gobierno Abierto" by Rafael MartÃnez Puón. Experience and analysis of the implementation of Open Government components in the Mexican public administration.
On the quasi-sure superhedging duality with frictions
arXiv
arXiv
We prove the superhedging duality for a discrete-time financial market with proportional transaction costs under model uncertainty. Frictions are modeled through solvency cones as in the original model of [Kabanov, Y., Hedging and liquidation under transaction costs in currency markets. Fin. Stoch., 3(2):237-248, 1999] adapted to the quasi-sure setup of [Bouchard, B. and Nutz, M., Arbitrage and duality in nondominated discrete-time models. Ann. Appl. Probab., 25(2):823-859, 2015]. Our approach allows to remove the restrictive assumption of No Arbitrage of the Second Kind considered in [Bouchard, B., Deng, S. and Tan, X., Super-replication with proportional transaction cost under model uncertainty, Math. Fin., 29(3):837-860, 2019] and to show the duality under the more natural condition of No Strict Arbitrage. In addition, we extend the results to models with portfolio constraints.
Option pricing under normal dynamics with stochastic volatility
arXiv
arXiv
In this paper, we derive the price of a European call option of an asset following a normal process assuming stochastic volatility. The volatility is assumed to follow the Cox Ingersoll Ross (CIR) process. We then use the fast Fourier transform (FFT) to evaluate the option price given we know the characteristic function of the return analytically. We compare the results of fast Fourier transform with the Monte Carlo simulation results of our process. Further, we present a numerical example to understand the normal implied volatility of the model.
Persuading Multiple Audiences: An Information Design Approach to Banking Regulation
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A policy-maker concerned with the potential default of a bank conducts an asset quality review and a liquidity stress test under the scrutiny of multiple types of market participants (audiences). Surprisingly, the optimal comprehensive assessment is opaque when the bank has high-quality assets, and transparent when the bank has poor-quality assets. Additionally, the policy-maker imposes debt buybacks and contingent recapitalizations. I find that without the latter, disclosure of information about the bank's fundamentals may backfire. When the policy-maker lacks the technology to test the bank's private information, she designs a liquidity-provision program whereby the government offers to buy assets from the bank in exchange for cash and a public disclosure of the bank's liquidity position. Interventions display a non-monotone pecking order: the private sector funds banks with either high or poor-quality assets, while institutions with assets of intermediate quality participate in the government's liquidity program. My results shed light on the optimal way to disclose information in environments with multiple audiences and multi-dimensional fundamentals.
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A policy-maker concerned with the potential default of a bank conducts an asset quality review and a liquidity stress test under the scrutiny of multiple types of market participants (audiences). Surprisingly, the optimal comprehensive assessment is opaque when the bank has high-quality assets, and transparent when the bank has poor-quality assets. Additionally, the policy-maker imposes debt buybacks and contingent recapitalizations. I find that without the latter, disclosure of information about the bank's fundamentals may backfire. When the policy-maker lacks the technology to test the bank's private information, she designs a liquidity-provision program whereby the government offers to buy assets from the bank in exchange for cash and a public disclosure of the bank's liquidity position. Interventions display a non-monotone pecking order: the private sector funds banks with either high or poor-quality assets, while institutions with assets of intermediate quality participate in the government's liquidity program. My results shed light on the optimal way to disclose information in environments with multiple audiences and multi-dimensional fundamentals.
Religiosity and Risk Taking: Corporate Culture or Demand Driven?
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Does local religiosity create a risk averse corporate culture, or is the relationship between religiosity and firm risk taking driven by risk-sensitive demand? We utilize the detailed financial statements of financial services firms and find that both, local religiosity and the religiosity of firms’ largest geographic market, are negatively related to risk taking. The impact of religiosity is stronger for financially unconstrained firms and firms with one salient market, robust to various specifications mitigating endogeneity concerns, and supported by an analysis of headquarter moves. Our evidence suggests that firms’ reduction in risk taking is both corporate culture and demand driven.
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Does local religiosity create a risk averse corporate culture, or is the relationship between religiosity and firm risk taking driven by risk-sensitive demand? We utilize the detailed financial statements of financial services firms and find that both, local religiosity and the religiosity of firms’ largest geographic market, are negatively related to risk taking. The impact of religiosity is stronger for financially unconstrained firms and firms with one salient market, robust to various specifications mitigating endogeneity concerns, and supported by an analysis of headquarter moves. Our evidence suggests that firms’ reduction in risk taking is both corporate culture and demand driven.
Search Complementarities, Aggregate Fluctuations, and Fiscal Policy
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We develop a quantitative business cycle model with search complementarities in the inter-ï¬rm matching process that entails a multiplicity of equilibria. An active static equilibrium with strong joint venture formation, large output, and low unemployment can coexist with a passive static equilibrium with low joint venture formation, low output, and high unemployment. Changes in fundamentals move the system between the two static equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each static equilibrium. Sufficiently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive static equilibrium, while it plays a limited role in the active static equilibrium.
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We develop a quantitative business cycle model with search complementarities in the inter-ï¬rm matching process that entails a multiplicity of equilibria. An active static equilibrium with strong joint venture formation, large output, and low unemployment can coexist with a passive static equilibrium with low joint venture formation, low output, and high unemployment. Changes in fundamentals move the system between the two static equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each static equilibrium. Sufficiently adverse shocks in periods of low macroeconomic volatility trigger severe and protracted downturns. The magnitude of government intervention is critical to foster economic recovery in the passive static equilibrium, while it plays a limited role in the active static equilibrium.
Socially Responsible Investors, Firm Value and Firm Risk
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This paper studies the association between ownership by socially responsible investors (SRIs) and firm outcomes. In particular, we examine their impact on firm value and firm risk. Since the inclusion of environmental, social, and governmental (ESG) issues in investment decisions is not directly observable, we define SRIs as signatories to the United Nation supported Principles for Responsible Investing (UN PRI). We argue that these investors possess a unique multi-attribute value function, which not only facilitates active, long-term monitoring, but also creates greater interest alignment between them and other stakeholders of the firm. We find that SRI ownership of listed European companies is linked with greater firm value and lower firm risk. Inferences are derived from panel data analysis based on 9,444 firm-year observations over a sample period from 2008-2017. Our findings are robust to a battery of robustness tests and lend support for a possible causal relationship between SRI ownership and firm outcomes. This study is relevant for the ongoing debate about regulation on sustainable finance and investing in Europe.
SSRN
This paper studies the association between ownership by socially responsible investors (SRIs) and firm outcomes. In particular, we examine their impact on firm value and firm risk. Since the inclusion of environmental, social, and governmental (ESG) issues in investment decisions is not directly observable, we define SRIs as signatories to the United Nation supported Principles for Responsible Investing (UN PRI). We argue that these investors possess a unique multi-attribute value function, which not only facilitates active, long-term monitoring, but also creates greater interest alignment between them and other stakeholders of the firm. We find that SRI ownership of listed European companies is linked with greater firm value and lower firm risk. Inferences are derived from panel data analysis based on 9,444 firm-year observations over a sample period from 2008-2017. Our findings are robust to a battery of robustness tests and lend support for a possible causal relationship between SRI ownership and firm outcomes. This study is relevant for the ongoing debate about regulation on sustainable finance and investing in Europe.
Stock Price Cycles and Business Cycles
SSRN
We present a simple model that quantitatively replicates the behavior of stock prices and business cycles in the United States. The business cycle model is standard, except that it features extrapolative belief formation in the stock market, in line with the available survey evidence. Extrapolation amplifies the price effects of technology shocks and - in response to a series of positive technology surprises - gives rise to a large and persistent boom and bust cycle in stock prices. Boom-bust dynamics are more likely when the risk-free interest rate is low because low rates strengthen belief-based amplification. Stock price cycles transmit into the real economy by generating inefficient price signals for the desirability of new investment. The model thus features a 'financial accelerator', despite the absence of financial frictions. The financial accelerator causes the economy to experience persistent periods of over- and under-accumulation of capital.
SSRN
We present a simple model that quantitatively replicates the behavior of stock prices and business cycles in the United States. The business cycle model is standard, except that it features extrapolative belief formation in the stock market, in line with the available survey evidence. Extrapolation amplifies the price effects of technology shocks and - in response to a series of positive technology surprises - gives rise to a large and persistent boom and bust cycle in stock prices. Boom-bust dynamics are more likely when the risk-free interest rate is low because low rates strengthen belief-based amplification. Stock price cycles transmit into the real economy by generating inefficient price signals for the desirability of new investment. The model thus features a 'financial accelerator', despite the absence of financial frictions. The financial accelerator causes the economy to experience persistent periods of over- and under-accumulation of capital.
Strategic Formation and Reliability of Supply Chain Networks
arXiv
arXiv
Supply chains are the backbone of the global economy. Disruptions to them can be costly. Centrally managed supply chains invest in ensuring their resilience. Decentralized supply chains, however, must rely upon the self-interest of their individual components to maintain the resilience of the entire chain.
We examine the incentives that independent self-interested agents have in forming a resilient supply chain network in the face of production disruptions and competition. In our model, competing suppliers are subject to yield uncertainty (they deliver less than ordered) and congestion (lead time uncertainty or, "soft" supply caps). Competing retailers must decide which suppliers to link to based on both price and reliability.
In the presence of yield uncertainty only, the resulting supply chain networks are sparse. Retailers concentrate their links on a single supplier, counter to the idea that they should mitigate yield uncertainty by diversifying their supply base. This happens because retailers benefit from supply variance. It suggests that competition will amplify output uncertainty. When congestion is included as well, the resulting networks are denser and resemble the bipartite expander graphs that have been proposed in the supply chain literature. Finally, we show that a suppliers investments in improved yield can make them worse off. This happens because high production output saturates the market, which, in turn, lowers prices and profits for participants.
Systemic Risk of the Consumer Credit Network across Financial Institutions
SSRN
We investigate a network of financial institutions in Korea using the Korea Consumer Credit Panel (KCCP). The main contribution of this paper is that we construct the network of financial institution from the consumer credit level. We assume each consumer make a loan from multiple institutions so that those institutions share same risk from same consumer no matter of quality or type of loan. Then we construct the financial network between institutions and compute contagion index based on those multiple connection with a weight of default probability of individual borrowers. We found strong connection with banking institutions and credit card firms due to convenience in making small-amount loans with credit cards. However, when we give an weight with default probability to the linkage among institutions, connections of banking institution with savings bank, non-credit card finance corporation and merchant banking are stronger than others, while banking institution holds center position and has biggest amount of loans individually. Contagion index hit a peak in 2013Q1 and then fell rapidly, finally has been fluctuated in relatively low level from 2016 to 2017Q2. The result in our paper enables the authority to watch the systemic risk from consumer credit level with specific consumer type with their default probability.
SSRN
We investigate a network of financial institutions in Korea using the Korea Consumer Credit Panel (KCCP). The main contribution of this paper is that we construct the network of financial institution from the consumer credit level. We assume each consumer make a loan from multiple institutions so that those institutions share same risk from same consumer no matter of quality or type of loan. Then we construct the financial network between institutions and compute contagion index based on those multiple connection with a weight of default probability of individual borrowers. We found strong connection with banking institutions and credit card firms due to convenience in making small-amount loans with credit cards. However, when we give an weight with default probability to the linkage among institutions, connections of banking institution with savings bank, non-credit card finance corporation and merchant banking are stronger than others, while banking institution holds center position and has biggest amount of loans individually. Contagion index hit a peak in 2013Q1 and then fell rapidly, finally has been fluctuated in relatively low level from 2016 to 2017Q2. The result in our paper enables the authority to watch the systemic risk from consumer credit level with specific consumer type with their default probability.
Tangible Asset Impairments Under IFRS: The Impact of Enforcement
SSRN
Using an international sample of 38 jurisdictions that follow IFRS, I evaluate potential indicators of tangible asset impairments (TAI) and their interaction with legal enforcement. Consistent with expectations, I find that both economic and opportunistic indicators demonstrate a significant relation with TAI and that they are further affected by legal enforcement. In particular, under weak enforcement regimes, empirical findings suggest that opportunistic indicators, such as earnings smoothing and debt pressure, are significantly related with TAI besides economic indicators. In strong enforcement jurisdictions, the importance of economic indicators, such as sales changes and market returns, enhances and the effect of debt pressure attenuates substantially. However, my results reveal that the effect of strong enforcement on indications of earnings smoothing incentives is immaterial. This evidence indicates that legal enforcement constitutes a beneficial institutional attribute but it does not restrain all the aspects of managerial opportunism.
SSRN
Using an international sample of 38 jurisdictions that follow IFRS, I evaluate potential indicators of tangible asset impairments (TAI) and their interaction with legal enforcement. Consistent with expectations, I find that both economic and opportunistic indicators demonstrate a significant relation with TAI and that they are further affected by legal enforcement. In particular, under weak enforcement regimes, empirical findings suggest that opportunistic indicators, such as earnings smoothing and debt pressure, are significantly related with TAI besides economic indicators. In strong enforcement jurisdictions, the importance of economic indicators, such as sales changes and market returns, enhances and the effect of debt pressure attenuates substantially. However, my results reveal that the effect of strong enforcement on indications of earnings smoothing incentives is immaterial. This evidence indicates that legal enforcement constitutes a beneficial institutional attribute but it does not restrain all the aspects of managerial opportunism.
The Corrosion Critique of Benefit Corporations
SSRN
This Article evaluates what it labels the corrosion critique of benefit corporation statutes. These statutes have emerged as the leading new statutory alternative to enable and encourage social enterprises, businesses which seek both to generate financial returns for their investors while also pursuing social missions. Some persons who strongly support social enterprises have criticized benefit corporation statutes, arguing that they create a mistaken impression that companies organized under ordinary corporation statutes cannot consider the interests of non-shareholder stakeholders except insofar as doing so benefits shareholders in the long run. This corrosive effect on the understanding of most corporations may impede the adoption of socially responsible behavior.The Article distinguishes three conceptions of the legal purpose of corporations and whose interests officers and directors should consider: shareholder-only, stakeholder-optional, and stakeholder mandatory. It also identifies two leading justifications of benefit corporation statutes. The enabling justification asserts that corporate law constrains the ability of directors and officers to consider the interests of stakeholders other than shareholders because it imposes the shareholder-only conception of corporate purpose. The branding justification asserts that benefit corporations help companies attract investors, customers, and employees by giving them a way to credibly commit to considering the interests of other stakeholders through adopting the stakeholder-mandatory conception. Having established these categorizations, the Article offers a mixed verdict as to the validity of the corrosion critique. The critique does not apply to the branding justification. For the enabling justification, the critique is mostly valid in states with corporate constituency statutes, since such states have adopted the stakeholder-optional conception for ordinary corporations, and thus it is false to imply (as the enabling justification does) that ordinary corporations are constrained in considering the interests of various stakeholders. The corrosion critique does not, however, apply in Delaware and probably other non-constituency statute states, which have adopted the shareholder-only conception for ordinary corporations. The Article concludes that advocates of benefit corporations should stop using the enabling justification, which is subject to the corrosion critique in over half of all states (those with constituency statutes), and which justification is weak on other grounds as well. Focusing on the branding justification will direct transactional lawyers and businesses to the right reasons for considering becoming a benefit corporation, and will focus policymakers and scholars on the right questions to ask in evaluating the usefulness of benefit corporation statutes.
SSRN
This Article evaluates what it labels the corrosion critique of benefit corporation statutes. These statutes have emerged as the leading new statutory alternative to enable and encourage social enterprises, businesses which seek both to generate financial returns for their investors while also pursuing social missions. Some persons who strongly support social enterprises have criticized benefit corporation statutes, arguing that they create a mistaken impression that companies organized under ordinary corporation statutes cannot consider the interests of non-shareholder stakeholders except insofar as doing so benefits shareholders in the long run. This corrosive effect on the understanding of most corporations may impede the adoption of socially responsible behavior.The Article distinguishes three conceptions of the legal purpose of corporations and whose interests officers and directors should consider: shareholder-only, stakeholder-optional, and stakeholder mandatory. It also identifies two leading justifications of benefit corporation statutes. The enabling justification asserts that corporate law constrains the ability of directors and officers to consider the interests of stakeholders other than shareholders because it imposes the shareholder-only conception of corporate purpose. The branding justification asserts that benefit corporations help companies attract investors, customers, and employees by giving them a way to credibly commit to considering the interests of other stakeholders through adopting the stakeholder-mandatory conception. Having established these categorizations, the Article offers a mixed verdict as to the validity of the corrosion critique. The critique does not apply to the branding justification. For the enabling justification, the critique is mostly valid in states with corporate constituency statutes, since such states have adopted the stakeholder-optional conception for ordinary corporations, and thus it is false to imply (as the enabling justification does) that ordinary corporations are constrained in considering the interests of various stakeholders. The corrosion critique does not, however, apply in Delaware and probably other non-constituency statute states, which have adopted the shareholder-only conception for ordinary corporations. The Article concludes that advocates of benefit corporations should stop using the enabling justification, which is subject to the corrosion critique in over half of all states (those with constituency statutes), and which justification is weak on other grounds as well. Focusing on the branding justification will direct transactional lawyers and businesses to the right reasons for considering becoming a benefit corporation, and will focus policymakers and scholars on the right questions to ask in evaluating the usefulness of benefit corporation statutes.
The Economic Value of VIX ETPs
SSRN
The fairly new VIX ETPs have been promoted for providing effective and easily accessible diversification. We examine the economic value of using VIX ETPs for diversification of stock-bond portfolios. We consider seven different investment strategies based on short-sales constrained and unconstrained investors who use four different investment styles for their optimization strategy. Our analysis begins in 2009, when the first VIX ETPs are introduced, and therefore only considers the period after the recent financial crisis. For investors prohibited from short selling, the diversification benefits of the VIX ETPs do not offset the negative returns on the VIX ETPs. Hence there is a negative economic value of including VIX ETPs in stock-bond portfolios. This applies to all investment styles. It even applies when adjusting for a simulated market crash. For investors who are not constrained from selling assets short, the results are mixed as the economic value of VIX ETPs vary with respect to investment style and product.
SSRN
The fairly new VIX ETPs have been promoted for providing effective and easily accessible diversification. We examine the economic value of using VIX ETPs for diversification of stock-bond portfolios. We consider seven different investment strategies based on short-sales constrained and unconstrained investors who use four different investment styles for their optimization strategy. Our analysis begins in 2009, when the first VIX ETPs are introduced, and therefore only considers the period after the recent financial crisis. For investors prohibited from short selling, the diversification benefits of the VIX ETPs do not offset the negative returns on the VIX ETPs. Hence there is a negative economic value of including VIX ETPs in stock-bond portfolios. This applies to all investment styles. It even applies when adjusting for a simulated market crash. For investors who are not constrained from selling assets short, the results are mixed as the economic value of VIX ETPs vary with respect to investment style and product.
The Impact of Financial Education of Managers on Medium and Large Enterprises â€" A Randomized Controlled Trial in Mozambique
SSRN
This paper studies the impact of a financial education program for top managers of medium and large enterprises in Mozambique through a randomized controlled trial (RCT). We use survey data and financial reporting data to show consistent evidence that managers adjust some financial policies in response to the education program. The largest treatment effects are on short-term financial policies related to working capital, generating a positive impact on cash flows due to reductions in account receivables and inventories. There is also a smaller but significant, positive impact on long-term investment. These firm policy changes improve the firm performance of the treated firms. Overall, our results suggest that relatively small and low-cost interventions, such as a short executive education program in finance, improve financial practices and can affect economic development.
SSRN
This paper studies the impact of a financial education program for top managers of medium and large enterprises in Mozambique through a randomized controlled trial (RCT). We use survey data and financial reporting data to show consistent evidence that managers adjust some financial policies in response to the education program. The largest treatment effects are on short-term financial policies related to working capital, generating a positive impact on cash flows due to reductions in account receivables and inventories. There is also a smaller but significant, positive impact on long-term investment. These firm policy changes improve the firm performance of the treated firms. Overall, our results suggest that relatively small and low-cost interventions, such as a short executive education program in finance, improve financial practices and can affect economic development.
The US Bond Market before 1926: Investor Total Return from 1793, Comparing Federal, Municipal and Corporate Bonds Part II: 1857 to 1926
SSRN
From 1857 scholars have relied on Macaulay (1938) to track changes in interest rates during the period before the Ibbotson data begin. Holding period returns, where of interest (e.g., Siegel 1992a, 1992b), have been calculated from summary yield inputs such as those tabulated by Homer (1963), rather than observed prices of individual bonds. Here in Part II of the paper I explain how Homer got Macaulay wrong, misleading downstream compilers such as Siegel, and causing him to under-estimate 19th century bond returns. Values in Homer taken from Macaulay are not yields, but mathematical constructions erected on a (distant) foundation of observations. I correct Siegel’s under-estimate by retrieving bond prices from Macaulay’s sources and calculating holding period returns directly. I also correct a more general failure to treat Federal bonds properly during the greenback era. In the aggregate I find real bond returns in the second half of the 19th century to be about 150 basis points higher than Siegel. With this correction, in conjunction with corrected stock returns before 1871, I find that bond returns matched stock returns over the entire 19th century. The “stocks for the long run†thesis now appears to be a mistaken extrapolation from a few decades in the middle of the 20th century. No support for it can be found in the 19th century.
SSRN
From 1857 scholars have relied on Macaulay (1938) to track changes in interest rates during the period before the Ibbotson data begin. Holding period returns, where of interest (e.g., Siegel 1992a, 1992b), have been calculated from summary yield inputs such as those tabulated by Homer (1963), rather than observed prices of individual bonds. Here in Part II of the paper I explain how Homer got Macaulay wrong, misleading downstream compilers such as Siegel, and causing him to under-estimate 19th century bond returns. Values in Homer taken from Macaulay are not yields, but mathematical constructions erected on a (distant) foundation of observations. I correct Siegel’s under-estimate by retrieving bond prices from Macaulay’s sources and calculating holding period returns directly. I also correct a more general failure to treat Federal bonds properly during the greenback era. In the aggregate I find real bond returns in the second half of the 19th century to be about 150 basis points higher than Siegel. With this correction, in conjunction with corrected stock returns before 1871, I find that bond returns matched stock returns over the entire 19th century. The “stocks for the long run†thesis now appears to be a mistaken extrapolation from a few decades in the middle of the 20th century. No support for it can be found in the 19th century.
The value of knowing the market price of risk
arXiv
arXiv
This paper presents an optimal allocation problem in a financial market with one risk-free and one risky asset, when the market is driven by a stochastic market price of risk. We solve the problem in continuous time, for an investor with a Constant Relative Risk Aversion (CRRA) utility, under two scenarios: when the market price of risk is observable (the {\em full information case}), and when it is not (the {\em partial information case}). The corresponding market models are complete in the partial information case and incomplete in the other case, hence the two scenarios exhibit rather different features. We study how the access to more accurate information on the market price of risk affects the optimal strategies and we determine the maximal price that the investor would be willing to pay to get such information. In particular, we examine two cases of additional information, when an exact observation of the market price of risk is available either at time $0$ only (the {\em initial information case}), or during the whole investment period (the {\em dynamic information case}).
